Ship of Fools (18 page)

Cooking the books at AIG meant that its share price was inflated. Those who bought shares at these artificial prices subsequently lost a total of over $500 million as they plunged again when the scandal emerged.

When the scam was uncovered in the US, Houldsworth was prosecuted - in the US - and pleaded guilty to charges of securities manipulation and the creation of false documents. (He co-operated with the authorities, testified against his co-conspirators and got probation, while five other executives from General Re and AIG went to jail.)

Strikingly, Houldsworth, whose crimes were committed in Dublin, was not prosecuted by the Irish authorities.

The Irish regulators had nothing at all to say about the case. The judge who sentenced Houldsworth and the others in the US remarked that ‘if fraud is contemplated . . . these people will know that they will be investigated and prosecuted for their involvement'. In Ireland ‘these people' continued to know that the likelihood would be that they would not be caught and that, if they were, the worst that might befall them would be an embarrassed silence.

The realisation that the IFSC had been involved in a spectacular tri-continental triple crown of dodgy dealing - Europe's biggest ever fraud, the largest bankruptcy in Australian history, and a $500 million scam in the US - meant that the Irish authorities surely had to react. They did - by bringing in more tax loopholes and corporate benefits and increasing their commitment to ‘light touch' regulation.

Particularly after Houldsworth pleaded guilty in 2005, there were ominous signs that the scandals were doing real harm to Ireland's international reputation. The normally supportive International Monetary Fund began to make noises about the laxity of regulation in the Dublin reinsurance market. Justin O'Brien highlighted the IFSC's place in the Houldsworth scams in an article in the Australian
Journal of Corporate Law
and in a number of prescient pieces in the
Irish Times
. O'Brien warned that the scandals ‘severely compromise the reputation of Ireland as an emergent financial services centre'. He quoted ‘off-the-record briefings provided to the author by senior regulators in Australia and the United States throughout August 2005'. One expressed ‘shock and dismay that Ireland had abdicated its responsibilities for short-term advantage'. Another said, ‘good luck to
Ireland if it thinks it is going to get away with it, but it won't'.

The essential reaction of the Irish regulators, however, was denial. After the Australian authorities banned Houldsworth and Ellingson in 2004, the Regulator did nothing about the fact that they were still employed at Cologne Re in Dublin. In March 2005, when the AIG scam had already come to light, it publicly endorsed this state of affairs, claiming that Cologne Re had taken ‘corrective action' in relation to the pair. On the one hand, said the Regulator's official spokesman, the authority was not empowered to take action against anyone except company directors. On the other hand, it claimed that in any case ‘We are satisfied with the corrective actions in relation to these individuals that have been taken to date by Cologne Re and we will continue to actively monitor the situation.' He was unwilling or unable to say what that ‘corrective action' was.

A few months later, the Regulator's chief executive Liam O'Reilly gave an interview to the
Irish Times
in which he said: ‘We will never get rid of original sin. We all fall down at times. We are not in the business to make sure everyone who falls is punished. It is our job to make sure there are appropriate systems, processes and procedures in place.' He went on to imply that the Regulator had known about Houldsworth's ‘audacious' adventures in Australia for a long time and had in fact acted to stop his activities in Dublin: ‘There was an implication in the media that we were caught by surprise,' O'Reilly said. ‘We knew about the issue well before it hit the papers. We were talking to regulators in Australia and the entity here. We had ensured these individuals were not in positions of power here. We are happy we dealt with it appropriately.' This was simply untrue: Houldsworth
had been in a sufficient position of power to co-engineer a $500 million fraud.

If there was denial from the regulators, there was positive defiance from the politicians. Ireland ‘declined to participate' in an International Monetary Fund programme to monitor offshore financial centres and their ‘compliance with supervisory and integrity standards' - a quiet signal that business would go on as usual.

The 2004 Finance Act contained incentives to encourage treasury management groups to locate even more of their activities in Dublin. As Christine Kelly, tax adviser to the IDA, explained to potential clients, the hope was that more corporations could ‘benefit from the alignment of business and tax objectives . . . For example, in the treasury sector there are opportunities arising from the potential to convert treasury operations into combined holding and financing operations. The location of both functions in the same jurisdiction offers accounting, tax and legal efficiencies in the redeployment and repatriation of surplus cash around an international group.'

One of the fruits of this strategy was the attraction, in 2009, of Australia's most despised company, the construction materials giant James Hardie. The company's fortune was founded on asbestos mining, leaving it with a huge overhang of compensation claims from sick miners. James Hardie dealt with this embarrassment by skipping off to domicile itself in Holland, leaving two small subsidiaries to deal with the compensation payments. These companies had assets of A$180 million, compared to a likely cost of asbestos-related claims estimated by a special commission of inquiry at A$1.5 billion. The ‘singularly unattractive' idea, as the commission put it, was that ‘the holding company would make the cheapest
provision thought “marketable” in respect of those liabilities so that it could go off to pursue its other more lucrative interests insulated from those liabilities'.

James Hardie's spinning of the truth in relation to this shortfall was referred to by the commission as a ‘culture of denial'. The commission remarked that ‘for nearly thirty years in this country we have had standards for business communications. Such communications are not to be misleading or deceptive . . . In my opinion they were not here observed.' In 2007, the Australian Securities and Investments Commission commenced civil proceedings against a number of current and former James Hardie directors, and sought declarations that the company had ‘made misleading statements and contravened continuous disclosure requirements'.

In 2009, James Hardie decided that it would feel right at home in Ireland. In its statement to shareholders on the proposed move of its HQ to Dublin, it pointed to the irritation that Dutch law imposed ‘the requirement for key senior managers to spend substantial time in the Netherlands away from key markets and operations in order to qualify for US/Netherlands tax treaty benefits'. In facilitating global corporate tax avoidance, the Dutch expected those corporations to observe the niceties of actually pretending to be operating from the Netherlands. The Irish required no such pretence. Besides, as the prospectus put it, the move ‘increases the company's flexibility by allowing certain types of transactions under Irish law'. As seasoned practitioners of the ‘culture of denial', James Hardie would be a fitting addition to the Potemkin village on the Liffey.

That Ireland was still in 2009 the favoured hang-out for ghost headquarters and global corporate refugees was a tribute to its own ‘culture of denial'. After the Houldsworth
scandals, the government and the regulators carried on as if nothing had happened.

At the IFSC annual lunch in December 2005, the first formal occasion for political comment after Houldsworth's guilty plea, the Minister for Enterprise, Micheál Martin, said nothing about the scandals but instead noted the ‘unhappiness in the business sector at the degree and extent of obligations imposed by directors' compliance statement obligations'. He boasted that he was changing these regulations to ensure that the law would be ‘less prescriptive about the methods a company uses to review its compliance procedures, and in not requiring review of the compliance statement by an external auditor'.

Even more importantly, Charlie McCreevy, now the EU Internal Markets commissioner, with responsibility for financial regulation, stood firmly by the idea of ‘principles based' regulation in which everyone agrees to nice ethical codes (not specific rules) and it is up to company boards (not external supervisors) to enforce them. He told the German-Irish Chamber of Commerce that ‘There is a temptation at national level to “gold-plate” rules and regulations, which only serve to impede the market without delivering effective assurances for consumers. This is a temptation we all need to resist . . . What Europe needs is a well-regulated but not over-regulated financial system.'

More starkly still, McCreevy made a speech directly to the Financial Regulator in Dublin in October 2005. He not only made no explicit reference to the scandals at the IFSC but the only possible, oblique nod in their direction was a warning that ‘we must resist the temptation to rush to regulate every time an accident occurs'.

He then launched into a paean to the virtues of letting it all hang out and the evils of regulation:

McCreevy and many of his listeners were indeed from the ‘unregulated generation' that had planted the flag of freedom from Dublin to the Cayman Islands before boldly going into the uncharted virtual territories of ghost banks and brass-plate companies. They had seen plenty of innovation and invention, as people thought up new ways to evade their taxes or shift billions through the ether. They had seen plenty of ‘mistakes' and ‘accidents'. All they lacked was the slightest ability to learn from them.

In spite of four major scandals involving criminal behaviour (DIRT, Ansbacher, Parmalat and Cologne Re), there was no sense that the political and regulatory systems ought to
regard the financial industry with a sharp eye and at a cool distance. Socially, culturally and ideologically, there was a shared set of assumptions and values that made it very easy to move from one side of the fence to the other. The borders between politicians and bankers, regulators and regulated became ever more porous.

The Fianna Fáil stalwart and former Minister for Foreign Affairs David Andrews is chairman of the board of AIG Europe, which made political contributions to his son Barry. The Irish Bankers Federation is headed by the former Fianna Fáil general secretary Pat Farrell. Liam O'Reilly went from being chief executive of the Financial Regulator to being a member of the boards of Merrill Lynch International Bank and of Irish Life and Permanent. While holding these banking positions, O'Reilly was still chairman of the Chartered Accountants Regulatory Board. ‘Liam's long experience in financial services, public administration and economic and monetary policy in Ireland and at EU level will be invaluable, ' Irish Life's chairperson Gillian Bowler explained on his appointment. On joining Merrill Lynch, O'Reilly explained that ‘Merrill Lynch asked me to join with good motives. It was to make sure that they were doing things right. I would be like a watchdog for them inside.' His bark seems to have been as gentle as his bite had been when he was a regulator. In February 2009, Merrill Lynch announced that the Dublin-based operation may have had a rogue trader on its books, costing it up to $120 million.

Paddy Teahon, former secretary general of the Department of the Taoiseach, and one of the most influential civil servants of the entire Celtic Tiger period, was also a director of Merrill Lynch's IFSC operation and of the huge property development company Treasury Holdings. Paul Haran, former
secretary general of the Department of Enterprise, Trade and Employment, is a director of Bank of Ireland, which paid him €122,000 in 2008 and €119,000 in 2009.

Adrian Byrne, who had raised suspicions about the Ansbacher scam back in the 1970s, and then became head of banking supervision at the Central Bank (and, until 2005, personal adviser to the chief executive of the Financial Regulator) is a director of the IFSC-based West LB Covered Bond Bank Plc. He is also a director of Intrinsic Value Investors Umbrella Fund Plc, an investment fund administered by State Street Fund Services, based at the IFSC. Maurice O'Connell, who was a senior figure at the Department of Finance during the bank scandals of the 1980s and then became the governor of the Central Bank, is a director of Defpa Bank at the IFSC. There is no suggestion that any of these men behaved in any way unethically or that they were ever less than diligent in performing their duties. The point, simply, is that no one moving between the worlds of supervision and active banking was likely to suffer from culture shock.

Perhaps the most vivid illustration of the ease with which regulators could move from one side of the fence to the other is the career of William Slattery, whose prescient warnings about the level of debt in the Irish economy were quoted in Chapter 5. He joined the Central Bank in the late 1970s and was directly responsible for the supervision of the IFSC from its inception in 1987 until 1995. He became deputy head of banking supervision, with hands-on responsibility for the regulation of all the banks and building societies. In 1996, less than a year after he left this position, he joined Deutsche International Ireland, an Irish subsidiary of the German bank, dedicated to servicing hedge funds, derivative funds and other offshore operations. From there, he became head
of the Irish division of the US financial services holding company State Street, and of its European Offshore Domiciles division.